Picture: ISTOCK
Picture: ISTOCK

It’s all smoke and mirrors around a possible merger with PPC.

The broader view is to build an African cement titan.

The Public Investment Corp (PIC), which holds 66% of PPC suitor AfriSam, has now bought up a smidgen more than 25% of SA’s biggest cement maker. With 75% of shareholders needing to approve any deal, this has stalemated more than 25% of PPC shareholders who have rejected a joint conditional partial offer from AfriSam and Canada’s Fairfax Africa Investments.

Apart from AfriSam-Fairfax Africa, the market has little to go on when it comes to pricing a merger — probably even less so now that Nigeria’s Dangote has pulled out.

Fairfax Africa has undertaken to buy R2bn in ordinary shares in PPC at R5.75/share.

The proposed merger ratio is a share exchange of 58 PPC shares for 42 AfriSam shares. The conditional partial offer proposal includes a R4bn recapitalisation of AfriSam before any merger proceeds.

PPC and some of the group’s bigger shareholders are far from impressed. They say the group is worth between R8/share and more than R10/share, if a control premium is added. “Assuming fair value is around R10/share, control premiums are typically 25%-35% above the fair value,” says Sam Sithole, CEO of Value Capital Partners, the holder of about 5% of PPC stock.

However, any stalemate over a deal cannot endure, despite the PIC’s ostensible support for the AfriSam-Fairfax Africa bid. The stage is set for a bidding war after PPC received a nonbinding expression of interest from global cement group LafargeHolcim. This is set to be followed by a firm intention offer in the week starting November 20.

LafargeHolcim — probably the world’s biggest cement company after Hong Kong-listed China National Building Material Company — has left investors guessing whether it is interested in PPC’s overall business, its SA assets, or only its rest-of-Africa assets — in Zimbabwe, the Democratic Republic of Congo, Ethiopia and Rwanda. Meanwhile, LafargeHolcim already has significant cement operations in SA.

Such alternatives create different value propositions for any possible merger.

SA’s competition authorities will be pressed to make good decisions in this regard. At the very least, PPC shareholders should demand this. AfriSam says its current debt is around R7bn taking into consideration both third-party debt with commercial entities and key shareholders — Phembani and the PIC.

The company says the R4bn recapitalisation by Fairfax Africa is going to settle almost all the third-party debt — bank debt — while there will be conversion of the R3bn payment-in-kind notes held by Phembani and the PIC into equity. The group says its equity value is calculated on an enterprise value of R7.55bn and net debt of no greater than R866m after a merger on the existing terms.

The value of PPC and any suitor, though, is mightily clouded by the potential broad-based black economic empowerment (BBBEE) shareholding in any merger.

For now, 66% of AfriSam is held by the state-mandated PIC and 30.5% by the black-empowered Phembani group headed by former MTN CEO Phuthuma Nhleko. The PIC, meanwhile, has just raised its holding in PPC to 25.058% of total issued ordinary shares.

In its latest presentation to analysts on October 23, AfriSam says the PIC and Phembani will add 17% pro forma BBBEE ownership in any merger, with no dilution to existing PPC shareholders. That is based on 42% ownership of PPC in any merger, with Fairfax Africa holding 60% of this and the PIC and Phembani together holding 40%.

AfriSam says PPC shareholders will need to determine whether PPC’s latest proposed BBBEE transaction will be dilutive to them. It says no details have been made available as to the cost of this plan. “Alternative BBBEE solutions could be costly, inconveniently timed and potentially dilutive,” AfriSam says.

In this regard, it says Sasol lost 7% of its value on the news of its replacement BBBEE transaction.

But it appears there are gremlins lurking around empowerment: “As you may be aware, AfriSam is and continues to be 100% black owned as indicated in its latest verification certificate. [But] the downturn in the economy, compounded by the structural changes in the industry, has necessitated AfriSam having to pursue an aggressive cost-cutting exercise. This, together with the recent changes in the BBBEE codes, has resulted in AfriSam having to drop from level 4 to level 6,” AfriSam says.

It adds that “many” other companies have experienced similar declines. “We are in the process of improving our score on these elements and anticipate that it will rise again in the next few years.”

Based on these precedents, and its own analysis, AfriSam’s view is that if the merger were to proceed, substantial cost savings would be achieved over time for the benefit of all shareholders. Typically, such cost savings and other synergies are not fully realised immediately, but are achieved within two to three years of consummation of the merger, according to the company.

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